The Hindu Business Line : `Leave gas price formula to buyer, seller'

"Since the market for natural gas is not homogenous - different sectors face different fuel price economics - the price of the gas deal, whether spot, short-term or long-term, will reflect those economics."

New Delhi , Sept. 23

Private players BG India and others through the Confederation of Indian Industry (CII) have held that the Government should normally not intervene in deciding on the pricing of natural gas.

BG and CII in their presentation to a high-level committee on a transparent pricing mechanism for gas sales have said that fixation of price should be left to the buyer and seller based on market conditions and only when there was any indication that the transaction may not be transparent should the Government be moved to look into the issue.

The committee was set up by the Petroleum Ministry to work out a formula that could be used to approve transactions for gas sales when the deal is not at arms length or readily transparent. The Government's interest is involved because it gets a share of profit petroleum. The issue of gas price becomes prominent with Government rejecting the formula worked out by Reliance Industries Ltd, led by Mr Mukesh Ambani, to sell gas to Reliance Natural Resources Ltd, led by Mr Anil Ambani.

`Market not homogeneous'

BG and CII have said that since the market for natural gas was not homogenous - different sectors face different fuel price economics - so the price of the gas deal, whether spot, short-term or long-term, would reflect those economics. "Reasonableness of price arrived at through bilateral arrangements, therefore, would also need to be taken account of," the two organisation have said.

As regards linkage of natural gas price with crude oil, CII felt that it was best suited for pricing of natural gas with floor or ceiling or s-curve indexation. Level of floor and ceiling is discussed or s-curve is adopted, which provides protection to seller when oil prices are low and the buyer when prices are higher.

BG India also pointed out that an E&P company, as a gas supplier, would be interested in maximising the return from its sales. Thus, a company's (with no affiliates) interests will be aligned with those of the Government from a profit petroleum and royalty regime point of view. "For this reason ordinarily there should be no concern with unaffiliated third party transactions since there is no financial incentive to the company to offer a lower price," BG has opined.

`Beware of loopholes'

It, however, cautions that there are loopholes, which non-affiliate parties could use to get around this. For example, a seller could offer a lower price to the non-affiliate buyer as part of a broader transaction in which the original seller receives a concession from the non-affiliate on a separate deal. "In other words, such sales would ordinarily be deemed approved and would only be open to review if there was an evidence to indicate that the transaction was not at arms length," BG has said.

The company has also said that any review of the transactions, which are not transparent must be flexible enough to accommodate short-term transactions since the element of review takes time, which imposes risks on parties and would lead to added costs.